Editor’s Note:
See page 3 for a link to Alphabetical List of Stand Occupational Classification Occupations; from Able Seaman to Zookeepers and Wildlife Biologists
Federal Reserve Governor Daniel K. Tarullo; At the 23rd Annual Hyman P. Minsky Conference: Stabilizing Financial Systems for Growth and Full Employment, Washington, DC.
April 9, 2014
In the more than five years that I have been a member of the Board of Governors of the Federal Reserve System, it has been hard not to concentrate on near-term economic prospects. The severe decline in the economy precipitated by the financial crisis and the magnitude of job and production loss in the Great Recession that followed have made a focus on recovery both understandable and imperative. But as I have prepared for Federal Open Market Committee (FOMC) meetings every six to seven weeks by examining incoming data and the analyses of our own staff and of outside economists, I have been struck by the evidence of longer-term challenges to the American economy that poke through shorter-term discussions.
There is considerable ongoing debate about whether the financial crisis and recession amplified changes already afoot in the economy, accelerated them, or simply revealed them more clearly. Whatever one’s view on that question, the confluence of some apparently secular trends raises important questions about our nation’s future growth potential and our ability to provide opportunity for all of our people. Indeed, these changes reflect serious challenges not only to the functioning of the American economy over the coming decades, but also to some of the ideals that undergird the nation’s democratic heritage. This evening I will address in some detail four particularly important developments:
- Productivity growth has slowed. As a result, the overall economic pie is expanding more slowly than before.
- Some indicators further suggest that workers have been claiming a smaller share of the overall economic pie during the past decade.
- Inequality has continued to increase, meaning that a larger portion of overall economic resources is commanded by a smaller segment of the population.
- Economic mobility across generations is not particularly high in the United States, and it has not been increasing over time.
After detailing these trends, I will turn briefly to both the role and the limits of monetary policy in countering them.1
Structural Challenges for the American Economy
Lagging productivity growth
Over the long term, the pace at which our standards of living increase depends on the growth of labor productivity — that is, the increase in the amount of economic value that a worker can generate during each hour on the job. Unfortunately, the data on productivity growth in recent years have been disappointing. Although output per hour in the nonfarm business sector rose about 2-3/4 percent per year from the end of World War II through 1971, productivity has risen just 1-1/2 percent per year since then, excluding a brief burst of rapid growth that occurred roughly between 1996 and 2004.
Just as it took economists a long time to identify the sources of the surge in productivity that began nearly two decades ago, they are only now beginning to grapple with the more recent slowdown. Some have argued that the burst of productivity growth that began in the mid-1990s was the anomaly, and that the more pedestrian pace of growth over the past decade represents a return to the norm. In this view, the long period of rapid productivity growth that ended in the 1970s grew out of the technological innovations of the first and second Industrial Revolutions. But now, despite continued technological advances, a return to that pace of performance is thought unlikely. In particular, these authors argue that the information technology revolution of the past several decades–including the diffusion of computers, the development of the Internet, and improvements in telecommunications–is unlikely to generate the productivity gains prompted by earlier innovations such as electrification and mass production.
This somewhat pessimistic perspective is far from being conventional wisdom. While productivity has increased less rapidly in recent years than during the first three-fourths of the 20th century, per capita income (a statistic available over a longer time span) is still rising more quickly than it was even during the second Industrial Revolution. Indeed, some have argued that the problem with new technology is not with productivity growth but with our ability to capture the productivity in our statistics. Moreover, many economists and technophiles remain optimistic that we have yet to fully realize the potential of the information revolution, and that technological change will continue to bring inventions and productivity enhancements that we cannot imagine today. This view holds that there is no reason productivity could not continue to rise in line with its long-term historical average. It must be noted that, even among the productivity optimists, there are differences over how the expected progress will affect job creation and income distribution. In particular, some in this camp believe that we are likely to see a continuation of the pattern by which recent productivity growth seems to have mostly benefited relatively skilled workers. It may also have favored returns to capital investment, as opposed to labor, in greater proportion than past productivity gains.
While there is some reason for optimism about the prospects for technological progress, there are grounds for concern over the decline in the dynamism of the US labor market, an attribute that has contributed to productivity growth in the past and has traditionally distinguished the United States from many other advanced economies. Historically, the U.S. labor market has been characterized by substantial geographic mobility. Our high rates of geographic mobility are one facet of the overall dynamism of our labor market, which is also manifest in the continual churning of jobs through hirings and separations, as well as firm expansions and contractions — a process that the economist Joseph Schumpeter called “creative destruction.” To give a sense of the magnitude of this process, while net job gains and losses are typically measured in the hundreds of thousands each calendar quarter, gross job creation and destruction commonly run at a pace of roughly 7 million jobs each quarter. Creative destruction has been shown to improve productivity as jobs that have low productivity are replaced with jobs that yield greater productivity.
However, a variety of data indicate that this feature of labor market dynamism has diminished. Since the 1980s, internal migration in the United States over both long and short distances has declined. To give an example, the rate of cross-state migration was less than half as large in 2011 as its average over the period from 1948 to 1971. And, while we still see the level of employment rising and falling over the business cycle, the gross flows of people between jobs and of jobs across firms that underlie the observed aggregate changes have fallen over the past 15 years.
At this point, we do not have a full understanding of the factors contributing to the decline in labor market dynamism. As a number of economists who have studied the issue have pointed out, some of the explanations may be benign or even positive. For instance, the aging of the population accounts for some of the decline in migration and job churning, as older individuals are less likely to move and change jobs; such demographic factors probably do not represent an adverse reduction in dynamism. Moreover, some of the decline in turnover could be the result of individuals and firms finding productive job matches more quickly than before. For many employers and workers, the Internet has reduced the cost of posting job openings and the cost of searching for jobs. This more efficient process could result in better matches between firms and workers and thus fewer separations. Similarly, a reduction in firm uncertainty about the costs and benefits of investing could reduce firm-level churning in jobs. In both cases, workers and firms are able to achieve a good outcome with less turnover and presumably no loss of productivity.
While it seems possible that improved information could be a force behind the reduction in geographic mobility and labor turnover, there are less benign possibilities as well. For instance, an increase in the costs to firms of hiring and firing individuals or an increase in the costs to individuals of changing jobs could lead to fewer productivity-enhancing job changes. Alternatively, the reduction in churning could itself be a function of slower productivity growth, as slower productivity growth implies lower benefits to forming new matches.
